China stimulus on the way?

China data released over the weekend reinforced the narrative of the slowing Chinese growth. Media chatter suggested there were speculations of fresh stimulus owing to the weak macro picture. The price action in Chinese markets proved that this was just chatter.

IG Analyst

2015-09-14T10:41:29+0100

Source: Bloomberg

The ChiNext index plummeted 7.5% today, diving through the key 2000 level, which has been a pivot point of late. Normally, expectations of more growth boosting action would lead to demand for smaller and speculative stock, like the ChiNext or Shenzhen Composite Index (-6.7%), but today, market participants were probably not convinced that there will be a big plan in the pipeline.

Admittedly, the China A50 made a modest 0.6% gain, but looking at it broadly shows the blue-chip index is stuck in a sideways grind, remaining capped under the key 10,000 level.

This is not to say that there is not going to be any sliver of stimulus at all. For one, the PBOC is likely to stay on an easing bias. There is still plenty of room for more reserve requirement ratio (RRR) cuts, as well as another reduction to the benchmark interest rate. However, more monetary policy easing is likely to be targeted at keeping liquidity conditions at a comfortable level, rather than providing more direct impulse to economic growth.

As my colleague pointed out, the weekend data continued to reflect the two-speed Chinese economy, with consumption holding up while investment and the industrial sector decelerating. Both industrial output and fixed assets investment for August missed estimates, coming in at 6.1% y/y and 10.9% y/y year-to-date respectively. On the other hand, retail sales were better than expected at 10.8% y/y.

Excess capacity and weak external demand are still tilting growth risks to the downside. This is evident in the persistent disinflation trend we are seeing in the producer prices. The failure to reverse the disinflation pressure would see nominal GDP slowing further, which will weigh on the corporate sector, and by extension, wage growth and private consumption.

The Chinese authorities announced broad guidelines on the reform plan for state-owned enterprise (SOE) over the weekend. China plans to increase the pace of privatisation of SOEs by seeking more private capital, as they sought to reform ‘zombie enterprises’.

The Vice Chairman of the National Development and Reform Commission (NDRC) Lian Weiliang said details on the SOE mixed ownership and energy-sector reforms will be unveiled this year.

China is under pressure to improve the productivity and efficiency of its SOEs amid a slowdown in the Chinese economy. According to researchers affiliated with the State Council, the SOE reform could boost GDP by at least 0.33 of a percentage point per annum.

While market watchers will keep tabs on developments in China, the bigger event this week is the FOMC meeting on 16-17 September. Economists are divided in their opinion whether the Fed will move on rates this week, which suggested a very close call. Markets are less divided, where they see a 28% probability of a 25 basis point rate hike, based on the futures market.

A month ago, the odds were almost 50%. December is now the favourite, with a 59% likelihood. A continued lack of pickup in inflationary pressure is causing complications for the Fed to raise interest rates. The CPI data for August out on 16 September is expected to show a slight decline from the previous month.

The decreasing probability of a rate hike in September saw investors trimming their USD holdings, the dollar index fell to around 95.0 which lifted the EUR/USD above 1.13. USD/JPY traded lower towards the 120 handle. We should continue to see more position squaring ahead of the decision, which would keep upsides in the US dollar limited given the prevalent view.

However, the US dollar’s weakness is likely to reverse as the longer-term trend still points towards an eventual rate hike. In addition, Europe, Japan, Australia and New Zealand remain on an easing bias, which would play up the policy divergence on a longer time frame.

Soft start for Singapore after elections

The STI started the week on a negative tone, weighed by global sentiments rather than domestic affairs. The ruling party, People’s Action Party (PAP) improved their popular vote to nearly 70%, in a general election where many were expecting the opposition to make further inroads. However, the stronger mandate did not translate into optimism in the local financial markets.

Unlike other countries, the election in Singapore normally does not have significant impact on the stock market. A while back I looked at the pre and post-election one-month movements in the STI for the previous five elections. The result was inconclusive.

A major reason could be that political stability has always been taken as a given. This means that should there be perceptions of potential political instability, due to the PAP losing a significant amount of seats or an erosion of its capability to pass laws, we would perhaps see a negative reaction in the Singapore stock market.

Last week saw the STI posting the first weekly gain after seven weeks of losses. This week could see a return to negative terrain, as FOMC and China slowdown loom overhead. Thinning volume also exacerbated the downward pressure. Trading volume in the STI today is over 30% lower than the 30-day average volume.

Noble fell almost 10% at one point on Monday, as traders continued to make short bets on the commodity trader. As of 10 September, short interest rose to a record 22.3% of free float, according to Markit data.

The share price tumbled below SGD0.50 soon after the opening bell, as a rating downgrade from Malaysian rating agency RAM ratings last Friday added to the company’s woes. RAM lowered its outlook for Noble’s AA2 Sukuk rating to ‘negative’ from ‘stable. The negative outlook indicated continued pressure on Noble’s credit profile. In view of the bearish outlook for commodities, a meaningful recovery in Noble share price will be a herculean task.

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